The New Bankruptcy Law Passed:
Big Changes in Bankruptcy Law Coming in October 2005
How will they effect you?
“The worst element of the bill is that it is going to force
a lot of people deeper into debt.”
- Senator Dick Durbin, D-IL.
If you’re thinking of filing for bankruptcy, DO IT NOW!. It will be much harder to qualify after October 17.
After eight years and three failed attempts, the credit card industry has finally got the bankruptcy law “reform” changes they’ve been lobbying for. Signed into law on April 20, 2005, most of the new law will take effect 180 days later, on October 17, 2005.
The new law, which marks the biggest change to bankruptcy law since 1978, prohibits some people from filing for bankruptcy altogether. And for those who manage to qualify for bankruptcy, it makes it harder to come up with manageable repayment plans and it has fewer protections from collection efforts than the prior law.
Arguments For and Against the New Law
The credit industry says changes were needed because the increasing number of personal bankruptcies – around 1.6 million in 2004, up from about 900,000 in 1995 – is costing them too much money. But while bankruptcies nearly doubled, credit card industry profits more than tripled in the same period – from $12.9 billion in 1995 to $31.6 billion in 2004. Senator Kennedy estimates the new law will net the credit card industry an additional $5 billion.
Those who opposed the new law say the credit card companies bring their problems on themselves by aggressively marketing high-interest credit cards to low income individuals and luring consumers with “easy credit” deals that balloon into huge debts due to compound late fees and high interest rates.
Who Files for Bankruptcy?
The vast majority of bankruptcy filers are not wealthy individuals trying to cheat the system. According to a 1999 study by federal bankruptcy judges, the average person filing for bankruptcy earns just $22,000 per year. Most have suffered a significant period of unemployment before filing.
According to a report by Consumers Union, 85% of elderly debtors cite medical or job problems as the reason for bankruptcy. Consumers Union also says that single moms trying to make ends meet make up a large portion of bankruptcy filers.
In addition, a recent Harvard study by Professor Elizabeth Warren reported that half of all bankruptcies are triggered by sudden uninsured medical expenses. (Information is also available from Professor Warren’s appearance before the Senate Judiciary Committee.)
The changes that the new law brings will be devastating to many people who find themselves out of work, ill, or injured, and over their head in debt.
Following is a summary of the some of the changes to bankruptcy law coming in October 2005.
Fewer People Eligible for Chapter 7 Bankruptcy
Losers: Those who want to file for Chapter 7 bankruptcy but have an above-average income and could afford to pay a little each month, according to the IRS.
Traditionally, bankruptcy’s fresh start has been available to almost everybody. The proposed law, however, prohibits some people from filing for Chapter 7 bankruptcy altogether – those whose incomes are above the state median (quite low in some states) and who can pay as little as $100 per month to creditors. Whether or not a debtor can afford to pay $100 or more a month would be determined not by the person’s actual income and expenses, but by IRS rules that state what “reasonable” expenses are.
People denied a Chapter 7 bankruptcy either have to file for Chapter 13 bankruptcy and come up with a three- to five-year repayment plan or keep slipping further behind on their debts.
This restriction is one reason many women’s groups oppose the bankruptcy legislation. People who can’t file for Chapter 7 bankruptcy and wipe out their credit card balances, they fear, will have less money available to pay other debts — child support, for example.
Fewer People Able to Stick to Chapter 13 Repayment Plans
Losers: Those who want to file for Chapter 13 bankruptcy but reside where the cost of living is high.
Debtors forced into Chapter 13 bankruptcy because Chapter 7 is no longer available to them will find that the proposed law makes Chapter 13 bankruptcy more difficult. In Chapter 13 bankruptcy, debtors must put together a repayment plan, basing their payments on their income and expenses. Under the proposed law, actual expenses for many things don’t matter – debtors are allowed to claim only allowed expense amounts set each year by the IRS collections department. Thus, for certain expenses – housing, for example – even if the actual cost is higher, you will only be able to keep enough income to pay the allowed amount for housing. Some people, especially those living in areas where the cost of living is high, will be unable to follow through with a repayment plan.
Less Protection From Creditors’ Collection Efforts
Losers: People in the throes of an eviction, a state license suspension proceeding, or a family law proceeding.
One of the most powerful aspects of current bankruptcy law is called the “automatic stay.” This jargon refers to rules that immediately halt almost all collection actions and lawsuits against someone who files for bankruptcy. (For an explanation, including a list of common actions stopped by a bankruptcy filing under current law, see How Bankruptcy Stops Your Creditors: The Automatic Stay.)
The new law places limits on the automatic stay. Among other things, the automatic stay no longer stops or postpones:
actions to withhold, suspend, or restrict a driver’s license
actions to withhold, suspend, or restrict a professional or occupational license
lawsuits to establish paternity, child custody, or child support
divorce proceedings, or
lawsuits related to domestic violence.
Fewer Debts Wiped Out
Losers: People who recently bought luxury goods or received cash advances, as well as those who owe child support or those who incurred debts through fraud.
Some types of debts can never be wiped out in bankruptcy, and the proposed law expands this list.
Increased Costs and Delays in Filing
The new law requires most people to get credit counseling from a nonprofit agency before filing for bankruptcy. In addition, debtors have to complete a course on personal financial management before completing either Chapter 7 or Chapter 13 bankruptcy.
Another roadblock delays people who had not yet filed a tax return for a recent year. Anyone filing for Chapter 7 bankruptcy has to provide a federal tax return for the most recent tax year; those filing for Chapter 13 have to be current on tax returns for the previous four years.
And for those who seek an attorney’s help, it will be harder to find after October, and it may cost double what it does today. This is thanks to increased paperwork and new punitive laws that require attorneys to “investigate” the debtor’s claims and make the debtor’s attorney financially responsible for court costs and creditor’s attorneys’ fees if the debtor’s statements about their property and finances turn out to be false or incomplete. Some practicing bankruptcy attorneys are expected to discontinue their practice rather than face the increased financial risk.
Harder to Keep Automobiles
Changes in Chapter 13 law will require debtors who wish to keep their car to pay the full loan amount on car loans, rather than just the current value of the car, as is currently done in Chapter 13 plans. The new rule applies to all car loans less than two and a half years old as of the date you file. Similar new rules apply to all other property purchased within the last year prior to filing.
For More Information
The federal government’s Thomas website provides the official summary of the new law. More details and research about the new law can be found at websites of the American Bankruptcy Institute (www.abiworld.org), the Commercial Law League of America (www.clla.org), and our sister site, www.BANKRUPTCYPREPARERS.com.
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